The Fate of Deductions for Fiduciary Fees and Other Expenses
The Federal 2017 Tax Cuts and Jobs Act (the Act) added new internal revenue code Section 67(g) which eliminated all "miscellaneous itemized deductions" for individuals, trusts and estates for tax years 2018 through 2025.
Prior to the effective date of the Act, those taxpayers were allowed a federal income tax deduction for certain "miscellaneous itemized deductions," but only to the extent the amount exceeded 2% of the adjusted gross income (AGI). Further, prior to the Act, non-grantor trusts and estates had been afforded the opportunity to deduct administration expenses and expenses incurred to preserve the assets held in a trust or estate, such as fiduciary fees.
Q: Are any deductions still available to trusts and estates?
A: Most likely. Unless and until there is additional clarification from the IRS, it appears that there is substantial support for non-grantor trusts and estates to continue deducting certain expenses.
For example: Internal Revenue Code Section 67(e) permits a separate deduction for “costs which are paid or incurred in connection with the administration of [an] estate or trust and which would not have been incurred if the property were not held in such trust or estate.” A fiduciary fee is a common example of this type of an administration expense that would not ordinarily be incurred by an individual.
However, under the 2017 Act, Section 67(g) Congress drew a clear new line in suspending “… all miscellaneous itemized deductions that are subject to the [2%] floor under present law.” Therefore, because pre-2018 IRC Section 67(e) specifically exempted these administration expenses and fiduciary fees from the 2% limitation, it is reasonable to conclude that the newly enacted Section 67(g) was not intended to affect such deductions that are not subject to the 2% floor, such as fiduciary fees and other trust and estate administration expenses.
Also, while investment and portfolio management fees are no longer deductible under the Act, fiduciary fees and other costs to administer the trust would continue to be deductible. Note however, that an important caveat remains. Grantor trusts would not fall into this exception. This is because the income earned by grantor trusts are taxed as part of the grantor’s individual income, and thus fiduciary fees and trust administration expenses incurred by the grantor trust would not be deductible.
What Does CohnReznick Think?
Fiduciaries and financial institutions should coordinate their tax planning with a professional tax planner who can advise them about deductible fees and expenses associated with administration of trusts and estates. Institutions that play the dual role of fiduciary and investment broker should “unbundle” their fees to describe which fees were incurred for which services so that tax return preparers can accurately calculate the deductions still available.
Further, for taxpayers with grantor trusts, now may be an excellent time to consider “turning off” the grantor status and having the trust treated as a separate taxable entity. By converting to non-grantor status, the taxpayer may be able to benefit from the fiduciary fee deduction and maximize other tax opportunities otherwise limited under the Act for grantor trusts.
For additional information, please contact Sahri Zeger, Senior Tax Manager at sahri.zeger@CohnReznick.com or 857-264-3903 or Joy Matak, Principal at firstname.lastname@example.org or 862-245-5081.
Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.